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2018 Tariff Update and Impact Analysis

2018 Tariff Update and Impact Analysis

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In recent months, the U.S. government has taken significant tariff action, affecting a variety of products in a wide array of industries. In light of these developments, the KPMG Trade & Customs team is happy to share this update with our clients.

Please note that because the situation is fluid and evolving on a near daily basis, frequent updates are necessary to help ensure your company is acting on the most current information.

With that in mind, broadly speaking, the United States has undertaken three different tariff actions, with varying implications:

Section 301 unfair trade practice tariffs– Potential tariffs (25 percent) on over 1,300 individual goods of Chinese origin, in a variety of industries. The tariffs are not yet effective.

In response to these actions, China has announced retaliatory tariffs on a number of U.S.-origin products, including agricultural and automotive products as well as steel, aluminum, plastic, and other raw materials.

The following will provide an overview of each tariff action detailed above as well as provide a five-step recommendation to assist companies to begin addressing the potential impact each will have on U.S. business operations.

Background: Section 232 tariffs on steel and aluminum

On March 8, President Trump introduced, by Presidential Proclamation, tariffs on certain raw and semifinished steel and aluminum products. The steel (25 percent) and aluminum (10 percent) tariffs were issued pursuant to Section 232 of the Trade Expansion Act of 1962, which authorizes, among other actions, additional tariffs for national security reasons. Products covered by the tariff are mostly industrial and semifinished steel and aluminum goods, such as tubing, wire, rod, and flat-rolled sheets. Currently, the tariffs do not apply directly to consumer articles and other "finished goods" made of steel and aluminum.

The tariffs apply to imports of subject goods from all countries across the globe, with the exception of Canada, Mexico, countries that are part of the European Union, Brazil, South Korea, Australia, and Argentina, which are temporarily exempt through April 30, 2018 unless the exemption is extended. Other countries with which the United States has a "security relationship" are invited to negotiate alternatives. Further, the U.S. Secretary of Commerce has also published a procedure for securing product-based exclusions based on certain criteria, which is available to companies, including importers, who use steel or aluminum in business activities in the United States.

The tariffs went into effect on March 23, 2018, and are applied in addition to any current import duties and fees.

The Department of Commerce’s Section 232 report indicated the intent of the steel and aluminum tariffs under Section 232 is to raise domestic steel production from its present 73 percent of capacity to an 80 percent operating rate and domestic aluminum production from the present 48 percent average capacity to an 80 percent operating rate.

Background: Section 301 tariffs

On April 3, the United States Trade Representative (USTR) recommended an additional 25 percent tariff on certain products originating from China. These tariffs were proposed pursuant to Section 301 of the Trade Act of 1974, which authorizes, among other trade actions, tariffs to counteract violations of trade agreements or other discriminatory trade practices.

In the current case, the USTR determined that China has systematically sought to misappropriate U.S. intellectual property through joint venture requirements, unfair technology licensing rules, purchases of U.S. technology firms with state funding, and theft of business information via intrusions into U.S. computer networks. An interagency team estimated that China’s policies result in harm to the U.S. economy of at least $50 billion per year.

To counteract this practice, the USTR recommended tariffs on over 1,300 unique products originating from China, across a variety of industries. Industries affected include industrial and agricultural machinery, aerospace, information and communication technology, and consumer electronics, among others. The proposed tariffs would affect between $50 and $60 billion in imports annually.

Products affected include, but are not limited to:

Residential appliances

Chemicals

Semi- conductors

Printers /scanners

Televisions and stereos

Aerospace apparatus

Power and hand tools

Motors/ engine parts

Agricultural machinery

Electrical machines

Home furnishings

Brewing Machinery

Plastic products

Machine tools

Printed circuit boards

Bearings

Iron/steel/ aluminum

Medical supply goods

Biomedical products

Motorcycles/ automotive

While a list of Harmonized Tariff Schedule (HTS) codes affected by the tariffs has been published by USTR, the Section 301 tariffs are currently subject to a public comment period and will not take effect until the review process is complete. At such time, we expect a final list of products subject to additional tariffs to be published (on or after May 22, 2018).

At present, we are not aware of a specific date for when these tariffs might become effective, nor can we predict what the final list of products will look like; however, we are tracking updates daily.

Background: Chinese retaliation

In addition to the retaliatory tariffs announced in response to the administration’s steel and aluminum tariffs, on April 4, China announced a second set of potential retaliatory tariffs—this time on 106 U.S. products affecting as much as $50 billion in US exports.

The official list of affected HTS codes has not yet been released, but the product groups targeted include aircraft and automobiles, including parts and components; industrial apparatus and machinery; plastic products; agricultural products and juices; and various alcohol and tobacco products.

At present, the Chinese Ministry of Commerce has not advised when these tariffs might become effective; however, we are closely monitoring developments.

Additional tariff actions – Section 201

Prior to any of the actions taken above, the U.S. government also announced import tariff rate quotas on residential washing machines (starting at 20 percent), and cells and modules used in solar panels (starting at 30 percent). These tariffs are set to phase out over the course of three and four years, respectively, and apply to imports from all countries globally. An interagency team estimated that China’s policies result in harm to the U.S. economy of at least $50 billion per year.

Top five steps to get ahead

Collect trade data – Collecting all relevant trade data from both internal and government sources is the first step toward to begin an assessment of ongoing trade activity.

Map import activity – With sufficient data, you can begin to map the scope of your import activity so you are prepared to act when the new tariffs are released. Key considerations include: product classification; valuation; origin; likelihood of tariff exposure; and evaluation of cost savings strategies.

Consider duty savings strategies – Once you have an understanding on what your trade activity looks like, you can begin mapping strategies to mitigate the impact of any tariffs that may apply. This would include evaluation of available cost savings programs that may have gone unused in the past, as well tariff engineering strategies to potentially exclude certain products from consideration under the tariffs altogether. Begin assessing whether any duty savings programs or strategies might be feasible/more attractive in the new trade landscape.

Review your trade compliance function – Consider the capacity of your organization’s trade compliance function. Many product lines previously entered duty free may become subject to significant duty under Section 301. How can you make efficient use of resources to prepare for increased compliance obligation?

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The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.